Time to go

Severance deals in the public sector often hit the headlines in the local and national press. Melanie Carter looks at the role of the external auditor in this sensitive area.

Severance arrangements for senior staff in local government is a fraught and controversial area. On the one hand, there are the highly-skilled senior officers who know their worth and the value to the organisation of their leaving without a fuss. On the other hand, there are the local taxpayers, who are often appalled at the sometimes enormous sums of money paid to secure a deal. In the middle is the external auditor.

Imagine the scenario:

Your authority has almost reached agreement with the chief executive, the finance director or whomever is the senior member of staff that just has to go. It is not clear whose fault it is that the organisation ended up in this position, it is just that it cannot move on whilst this particular member of staff is in post. Relationship breakdown with councillors, failure to adapt to the changing demands of the sector, whatever the reason, the public interest is best served with a new broom.

So at the last minute your authority contacts your external auditor to ask whether he or she is happy with the deal. Surely nothing can go wrong now that both sides have finally, painfully reached an agreement. The external auditor wants to know how a £300,000 deal (after capitalisation of the award of added years) can be said to be value for money. He or she also wants to know how the authority justifies in law a £100,000 compromise payment when its own legal advice is that the officer in question does not have that good a case.

So it is that the timing of the deal can go awry and the auditors get blamed for last minute delays. It is, however, better to sort it out now than to have to face a qualified opinion at the end of the year. The worst case scenario would be a declaration of unlawfulness before the courts under section 17 Audit Commission Act 1998. Happily, matters very rarely end up there.

How do you avoid this? First, get your external auditor involved early. Second, make sure that you have obtained both public law and employment law advice. One without the other will not do.

The case of Allsop v North Tyneside is often cited as the source of much of this difficulty. That case merely illustrated, however, what has always been the case. Public authorities may only act within their statutory powers and any decisions they take are subject to the normal public law constraints (reasonableness, proper purpose, fairness, etc.).

As such, local authorities cannot make severance payments over and above that which the legislation allows. Add to this another fundamental, long standing principle that remuneration should be the pecuniary equivalent of services rendered and the end point is serious restraints on the severance payments that may be lawfully made.

Public bodies are not in the same position as private employers – much as they would often like to be and, some would argue, should be. Authorities cannot simply throw money at a problem to make it go away. That said, after having advised auditors on many severance arrangements, experience shows that the law does not best serve authorities. Greater flexibility is needed at senior level, as the reality is that it is in no-one’s interests to have a disaffected leader or senior manager at the helm.

So, when you contact the external auditor for a view on a severance deal, what will he or she be looking for? Here are the kinds of issues that will come up:

1. Is the authority exercising its powers for a proper purpose: for example, are you claiming to make a compensation for loss of office payment when the real purpose is to persuade someone to leave?
2. Has the authority taken the right matters into account: for example, if it is a compensation for loss of office payment, has it fixed the amount according to what the person is likely to lose (therefore considering age and job prospects)?
3. Has the authority put someone on garden leave or made a payment in lieu of notice? If so, has it got a good reason for not requiring the officer to come to work for this period?
4. Has the authority determined the level of any compromise payment by reference to what the person might be likely to get if successful in court/at Tribunal?
5. Be very careful of salary increases in the final year of service lest they be deemed to be for the purpose of increasing pension benefits; be even more cautious of any backdating of a salary increase.
6. Look at the capitalised cost of any added years and make sure that council members have been made aware of the full financial implications.
7. Has the authority kept someone in service solely for the purpose of getting them to an age when they are eligible for early retirement?
8. Is the authority claiming this is an interests of efficiency retirement when in reality this is a case that ought to be dealt with via the disciplinary/dismissal route?
9. Has the authority asked itself under what power it is proposing to make each head of payment (for example, in relation to outplacement support or legal costs)?
10. Have the relevant decisions been made by the right people – who or what committee has the delegated authority to negotiate and decide upon the deal?

Always remember that the external auditor can only give you a provisional view. He or she cannot fetter their discretion as to their ultimate view on the audit and matters may come to light subsequently which call into question the legality of items of the severance deal.

Authorities can, with the right advice, take simple steps to make sure the compromise agreement goes ahead, that the external auditor is kept happy and the public purse is not abused. This smoothes the way forward and avoids some of the inevitable media outcries about improper and unlawful ‘golden handshakes’.

Melanie Carter is a public and regulatory law partner at Bates Wells & Braithwaite London LLP, specialising in local government and audit law.